Morgan Stanley (MDW) and Goldman Sachs Group Inc. (GS), two of Wall Street's premier investment banks, Tuesday posted higher profits as revenue from mergers and acquisitions and securities underwriting picked up.

The results surpassed analysts' expectations but came as investors questioned how much the rise in interest rates will hurt trading revenue, which has bolstered Wall Street profits over the last several years.

"Investment banking is a cyclical business," said Tim Woolston, who helps manage $4 billion at Boston Advisers Inc. (search) and holds shares in Goldman and Morgan Stanley. "If you think of pistons in an engine, it's a question of which pistons are functioning at any given time."

Goldman said second-quarter net income rose to $1.19 billion, or $2.31 per share, from $695 million, or $1.36 per share, a year earlier. But earnings were down from $2.63 per share in the first quarter of this year.

The average estimate of analysts polled by Reuters Estimates was $1.95 per share.

Morgan said its second-quarter net income rose to $1.22 billion, or $1.10 per share, from $599 million, or 55 cents per share, a year ago. It fell slightly from $1.11 per share in the first quarter of this year.

On average, analysts had expected $1.05 a share, according to Reuters Estimates.

Banking executives expect equities business and merger advisory services to compensate for a decline in bond trading, but they say the transition may not be a smooth one.

Both Goldman and Morgan said merger and acquisition advisory business and securities underwriting were relatively strong in the second quarter.

Goldman said its total revenue rose to $7.68 billion from $5.99 billion a year earlier but was down from $7.91 billion in the first quarter of this year.

Revenue from its advisory business doubled from a year earlier and rose 43 percent from the first quarter, to $513 million. Total debt and equity underwriting revenue rose 10 percent from a year earlier and was up 9 percent from the first quarter, to $440 million.

Morgan's total revenue for the second quarter rose 32 percent from the same period in 2003 and by 7 percent from the first quarter of this year, to $6.7 billion.

Revenue from advising companies on mergers and acquisitions, one of its most lucrative businesses, rose by 130 percent to $324 million.

Revenue from the fixed income, currency and commodities unit, which has led the firm's revenue growth in recent years, rose 15 percent from a year earlier to $1.89 billion, but declined 10 percent from the first quarter of 2004.

Morgan said revenue from fixed income sales and trading rose by 43 percent from a year earlier to $1.8 billion, while revenue from sales and trading of equities rose 29 percent to $1.1 billion.

Morgan shares were up 20 cents at $51.45 on the New York Stock Exchange (search), while Goldman shares were up 22 cents at $89.01.